Most valuable rebound trend for A shares in 2016 has started

Our attitude turns from being cautious to being optimistic since the mid-and-late May. Faced with adjustment in foreign market, decreasing central parity of RMB and plunge in domestic futures market, A-share market is relatively “persistent”. In our opinion, although there is no tendency situation this year, kinetic energy for the market to going short is insufficient amid fluctuation and the market will find new balance. In the medium term, with support from the state’s policy, less expectation on interest rate hike by the U.S. Federal Reserve and capital pumping into the market, the most valuable rebound trend in the A-share market for this year has started.

Expectation on U.S. interest rate hike lowered

“Although the U.S. economy was sluggish in the first quarter, it is expected to grow rapidly; therefore, it might be appropriate to slowly and cautiously raise the interest rate in the future.” said the U.S. Federal Reserve chair Janet Yellen on May 28. This remark then boosted U.S. dollar and the probability for interest rate hike beneath the interest rate futures in July and September jumped to 61 percent and 70 percent respectively. Despite the U.S. revised the actual GDP growth for the first quarter from the previous initial value of 0.5 percent to 0.8 percent, data released by the U.S. Department of Labor on last Friday showed that the seasonally adjusted non-farm employed population in the country in May increased by 38,000, hitting the worst record in five and a half years. But Bloomberg survey’s expectation on employment growth was revised from previous 160,000 to 123,000. The U.S. unemployment rate decreased from 5 percent in April to 4.7 percent in May. This is the last non-farm data before the Fed’s regular meeting, which is very important for whether the Fed will raise interest rate in summer. As the non-farm employment data performed poorly in April and got worsened unexpectedly again in May, the probability for interest rate hike by the Fed in next several months dropped significantly. The Federal fund futures predict that the timing for next interest rate hike might be around January 2017. Afterwards, the U.S. dollar index slumped remarkably and bulk commodity represented by gold saw rapid rebound.

The meeting of European Central Bank (ECB) on June 2 decided to keep benchmark interest rate unchanged, which was consistent with market expectation. According to recent statistics, the overall economic situation of Eurozone showed tendency of marginal improvement, which may be resulted from remarkable recovery of crude oil price in recent months. Based on this, the ECB raised expectation inflation and economic growth at this meeting, which was also the first time for the ECB to upgrade economic expectation since last year.

At the same time, the result of opinion poll on Brexit revealed that there are still a higher proportion of British supporting Brexit. It is predicted that the Breixt issue will continue to disturb global market and the European and U.S. stock indexes will experience severer volatility in the following one month.

Overall economy develops stably

In terms of China’s economic data, the manufacturing PMI recorded 50.1 in May, keeping flat with that in April and showing the economy has been under expansion for three consecutive months. Production index registered 52.3 percent, increasing by 0.1 percentage point when compared with that in April and staying above 52 percent for three consecutive months. High-tech industry and manufacturing related to consumption upgrade kept expansion, while PMI of high energy consumption manufacturing fell below 50 percent. New order sub-index declined by 0.3 percentage point from April to 50.7. Manufactured inventory index recorded 46.8 percent in May, representing 1.3 percentage points higher than that in April and indicating that de-stock is going on. Purchase price index of raw materials still stayed high at 55.3, falling by 2.3 percentage points when compared with that in April. Non-manufacturing commercial activities posted 53.1 percent in May, down by 0.4 percent from April. It kept at more than 53 percent for three consecutive months and flat with that in the same period of last year, which indicated that non-manufacturing continued to maintain stable growth. Resulted from fluctuation in securities market and other factors, commercial activity index in financial sector slipped greatly, which mainly contributed to the fall in commercial activity index in tertiary industry. Driven by the consumption during the May Day holiday, wholesale and retail, accommodation and catering, air transportation, post, tourism and other industries showed active performance. Telecommunication, Internet and software industries kept staying at more than 60 percent for three consecutive months.

The Outline of the National Innovation-Driven Development Strategy (hereinafter referred to as the outline) is rolled out recently and it backs up innovation-driven development with guidelines. As a top-level design document, the outline proposes the goals for three stages of the implementation of innovation-driven development strategy. The national science and technology innovation conference, meeting of academicians of the Chinese Academy of Sciences (CAS) and Chinese Academy of Engineering (CAE) and the ninth national convention of the China Association for Science and Technology (CAST) were held in Beijing last week. We believe that the arrangement about the implementation of innovation-driven development strategy in next five years in the 13th five-year plan highlights the leading role of technology innovation. The just released outline sets roadmap and timetable for building China into a technology innovation power, so the prospect of an economic upgrading boosted by technology innovation worth expectation.

Incremental capital starts to enter stock market

The SSE Composite Index hiked by 4.17 percent in last week, while the ChiNext Board Index recorded gains for five consecutive trading days. The market moved upward after horizontal fluctuation for nearly half a month, and in the meantime, incremental capital started to enter the stock market. Firstly, the northbound trading under the Shanghai-Hong Kong Stock Connect program sees continuous inflow since May 16. And now it has seen an inflow for 15 consecutive trading days with a total of 18,434 million yuan. Secondly, during the horizontal fluctuation since May 10, institutional seats listed on the trading volume ranking list also see net buying. Only 3 among the 15 trading days saw net selling. Thirdly, CSOP FTSE China A50 ETF is continuously favored by overseas funds in recent period. The ETF saw net subscription in three trading days last week and the total net inflow exceeded 5.6 billion yuan in nearly a week.

In the meantime, the problems proposed by the MSCI index last year including “quota allocation procedure, limit over capital flow and beneficial ownership” have been basically solved. As the bourses further improve the trading halts system and the expectation about decontrolling the positions of stock index futures and adjusting commission charges rises, the probability for A shares to be included into the MSCI index largely increases. Once A shares are included with initial 5 percent weighting in the MSCI index, an incremental capital around 140 billion yuan will be introduced into the A-share market. In addition, the inclusion will boost the internationalization of A-share market, improve the structure of investors and promote RMB’s international standing.

The A-share market has experienced two rebounds since the end of last August. It first rebounded by 22.64 percent from 2,850 points to 3,684 points in 79 trading days, while for the second rebound, it hiked by 12.1 percent from 2,638 points to 3,079 points in 49 trading days. We believe that these two rebounds are corrective rebounds after rapid excessive loss, so both the duration and range are limited. While this round of rebound, under the backdrop that the A-share market has returned to normal, the economy is recovering and enterprises’ profit is improving, sees recovery of value and will be stronger than previous two rebounds.

Generally speaking, institutional investors widely hold low position at present. The bearish side will be faced with great divergence, while the bullish momentum will keep gathering. At present, the rebound has just begun and might move upward amid the divergence of the bearish side. Investors have been ready and the securities sector has greatly surged, signaling that the most valuable rebound within 2016 have been kicked off. Each sector will take turn to show their performance. Investors can pay attentions to three areas. The first area is the stocks with low valuation represented by finance, real estate, food & beverage, household appliances and etc. The second area is about the technology sector represented by quantum communication, virtual reality, artificial intelligence, bioscience and new energy. The third area is about the cyclical sector represented by gold, rare earth, non-ferrous metals and coal.